This week, I am addressing another important aspect of protecting yourself from fraud: document all financial transactions in writing. The unfortunate reality is that people sometimes invest hundreds of thousands of dollars without getting anything in writing – usually because they trust the person they’re giving their money to.
When people call me to talk about a potential fraud case the first thing I ask for is copies of the paperwork. I remember being shocked the first time someone told me they didn’t have any, but I’ve since become jaded and cynical so nothing really surprises me anymore.
But it still makes no sense! Why would you write a 6-figure check to anyone without getting the terms of the transaction in writing? Even a loan needs to be well documented and signed by the borrower or it is hard to enforce it. If the deal goes bad, how are you going to enforce the terms if you don’t have anything in writing?
The terms of the financial transaction should be articulated clearly in writing and reviewed by a qualified legal professional (see Tip #3). This is true of all financial transactions, including loans which should be documented with a promissory note and signed by the borrower.
Whenever you are involved with a private investment opportunity, you should receive a detailed disclosure document called a private placement memorandum or PPM.
PPM’s can be long and difficult to understand, but they contain critical information about your investment including details about the company you are investing in and and the people who running it. Among other things, the PPM should contain detailed information about a business including:
- Risks associated with the investment and the business model;
- How the company intends to use your money;
- The company’s dividend policy;
- The company’s dilution policy, which impacts your earnings per share and proportional ownership;
- A description of the business, including its main products or services, the market, growth strategy, competition, employees, and other issues;
- A descriptions of current or threatened legal proceedings the company is involved in;
- Management details, including executive compensation, past legal problems and securities owned; and
- Restrictions on investments (resale or transfer)
If someone solicits an investment in a company but cannot give you a PPM, that should be a red flag. Note that publicly-traded companies also have extensive disclosures which are available online on the SEC’s database.
The bottom line: No matter how well you know or trust the person, never invest (or lend) your hard-earned money based on an oral promise or a handshake. Get the paperwork before you write the check, and then take the time to review it carefully. If you don’t understand it, hire an attorney.
This is the fourth tip in a ten-part series helping people protect themselves against scams and fraud. Fortunately, Ray Quinney and Nebeker has a team of experts who are well-versed in this area of law. For more information and resources, contact Mark W. Pugsley at email@example.com.
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